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Lane, JD, CFP, MBA, CRPS

Category: Tax

Satisfied Customers: 10152

Experience: Law Degree, specialization in Tax Law and Corporate Law, CFP and MBA, Providing Financial & Tax advice since 1986

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I am a US citizen. I have inherited property from my father

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Customer: Hello. I am a US citizen. I have inheritedproperty from my father when he passed almost 30 years ago. The property is located in another country. I want to sell the property. What are the tax consequences to that? Can I do a property exchange, similar to when you buy and sell property in the US - no capital gains as long as you repurchase property at a equal or greater value. JA: Thanks. Can you give me any more details about your issue? Customer: No sure what more details you need. JA: OK got it. Last thing — JustAnswer charges a fee (generally around $32) to post your type of question to Tax Experts (you only pay if satisfied). There are a couple customers ahead of you. Are you willing to wait a bit? Customer: Yes. JA: OK. Now I'm going to take you to a page to place a secure deposit with JustAnswer. Don't worry, this chat is saved. After that, we will finish helping you.

Hi - I hold a JD (Juris Doctorate, a doctoral degree in the law), concentration in Tax Law & Corporate law, an MBA (specialization in finance & tax), and BBA from Mercer University’s Stetson School of Business and Economics, as well as CFP® and CRPS designations. - I can help here

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Yes, your intuition or knowledge here is good, both relative to the fact that as a US citizen you'll have a capital gain tax to pay and that a 1031 exchange may be the answer

OK, I still don't see you coming back into the chat, so I'll provide some general information:

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First, yes, US citizens must pay income tax on all worldwide income ... Capital Gains tax is an income tax, so you will have to calculate the gain under the exact same rules as you would if a US located house were left to you. Your basis is the Fair Market value as of your father's death and is subtracted from sales price to determine gain. (Capital improvements would add to basis and lower gain)

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On the positive side, if it happened that you lived in the home for any 24 months of the five years before selling, as your residence, then you would be entitled to $250,000 exclusion on gain ($500,000 for those married filing jointly) just as if the house were located her as well

Now, regarding the 1031 exchange, given your situation, there IS on very important point ... UNLIKE the issue above, location of property DOES come into play here: (I'll underline the pertinent part, from the IRS piece on like-kind (section 1031) exchanges)

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Both properties must be similar enough to qualify as "like-kind." Like-kind property is property of the same nature, character or class. Quality or grade does not matter. Most real estate will be like-kind to other real estate. For example, real property that is improved with a residential rental house is like-kind to vacant land. One exception for real estate is that property within the United States is not like-kind to property outside of the United States. Also, improvements that are conveyed without land are not of like kind to land.

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Real property and personal property can both qualify as exchange properties under Section 1031; but real property can never be like-kind to personal property. In personal property exchanges, the rules pertaining to what qualifies as like-kind are more restrictive than the rules pertaining to real property. As an example, cars are not like-kind to trucks.

So although various kinds of real estate qualify as like-kind and would allow you to defer the gain into another property you would need to specify a replacement property that is not US property, and best practice would be to specify property in the same country.

The first limit is that you have 45 days from the date you sell the relinquished property to identify potential replacement properties.

The second limit is that the replacement property must be received and the exchange completed no later than 180 days after the sale of the exchanged property (or the due date - with extensions - of the income tax return for the tax year in which the relinquished property was sold, whichever is earlier.

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It is important to know that taking control of cash or other proceeds before the exchange is complete may disqualify the entire transaction from like-kind exchange treatment and make ALL gain immediately taxable.

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The way most people avoid premature receipt of cash or other proceeds is to use a qualified intermediary or other exchange facilitator to hold those proceeds until the exchange is complete.

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Finally, you can not act as your own facilitator. In addition, your agent (including your real estate agent or broker, investment banker or broker, accountant, attorney, employee or anyone who has worked for you in those capacities within the previous two years) can not act as your facilitator, the qualified intermediary, either.

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This third party facilitator (again referred to as the qualified intermediary) is key to the deferral of gain, because this way, you are not taking constructive receipt of the proceeds of sale from the property you're selling (exchanging actually).

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